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When Chinese authorities asked banks and payment platforms to stop supporting cryptocurrency transactions in June, there was a parallel drive to crack down on bitcoin mining operations in the country.
In Sichuan, one of the former hydropower-powered bitcoin mining hubs, the local branch of the National Development and Reform Commission on June 18 issued a joint statement with the energy bureau of the province that it will investigate and shut down crypto mining operations.
Crypto mainstay Xinjiang had put similar pressure on crypto miners, with other smaller mining centers in Yunnan and Inner Mongolia following suit – sending miners, Chinese and Westerners alike – to rushing towards new pastures. By the following month, crypto mining in the country had all but been shut down.
According to the Cambridge Bitcoin Electricity Consumption Index (CBECI), China’s hash rate – the speed at which a cryptocurrency miner works to develop a coin – has risen from just over 50% of the global hash rate. in January 2021 to 34.3% in June and 0% in July. As of September 2019, China accounted for 75% of the global hash rate.
Bitcoin and other cryptocurrencies have long been touted as paving the way for a decentralized future of finance, but fallout from the Chinese ban suggests they have the potential to boost foreign direct investment flows ( IDE), as miners move their operations between countries.
China less attractive
The bitcoin network needs large amounts of computing power to validate new “blocks” containing a ledger of all the latest bitcoin transactions, which spurs the search for inexpensive access to electricity.
Until this year, bitcoin miners were drawn to China for its cheap coal and hydropower, and the already established presence of bitcoin machine makers in the country, like Canaan. In addition, conditions in some specific regions of China, such as Inner Mongolia, which is cold and dry, were favorable for mining.
Michel Rauchs, chief digital analyst at the Cambridge Center for Alternative Finance, told fDi the exodus from China was due to anticipation of regulatory constraints, in line with growing sentiment that China was becoming a less attractive mining destination.
“Even before the one-and-a-half-year ban, it became apparent to minors that China was less attractive. [than] other countries, ”he said, citing political and regulatory risks.
Growing concerns about regulatory risk have highlighted the extent to which bitcoin’s operations are overseen by a central government, Mr Rauchs said.
Since the mining ban, the Central Bank of China, the People’s Bank of China, and nine other agencies, including the Public Security Bureau, have made all cryptocurrency transactions illegal.
The New Geography of Crypto Mining
With bitcoin trading at record highs throughout 2021, bitcoin miners had a strong incentive to leave China as soon as possible – and pockets deep to do so.
The exodus has changed the geography of crypto mining. Along with China’s exhausted hash rate in July, mining activity has increased elsewhere, according to CBECI data.
Between June and August, the United States’ share of the global hash rate increased from 21.8% to 35.4%, while it rose from 8.8% to 18.1% in Kazakhstan. In Canada, it fell from just under 6% to 10.8% and then fell back to 9.5%.
A Financial Times survey released in November found that since the ban in June, 14 of the world’s largest cryptocurrency mining companies have moved more than two million machines from China to the United States, Canada. , Kazakhstan and Russia.
As one of the main drivers of bitcoin miners is the cost of electricity, miners have been drawn to destinations with cheap electricity and pro-crypto administrations.
One such example is Texas, which has the largest deregulated electricity sector in the United States, which generally results in more competitive rates. Governor Greg Abbott tweeted in June that “Texas will be the leader in crypto.”
american opportunity
With the world’s largest bitcoin mining hash rate, the United States has also seen US-based mining companies expand their operations since arriving in their country.
US company BIT Digital began moving operations from China to the US in March 2020, due to “jurisdictional diversification” and “operational diversity,” said Sam Tabar, chief strategy officer of the company. Now, with no equipment in China, the Nasdaq-listed company is expanding in the United States, encouraged by the country’s regulatory stability. She now owns a factory near Buffalo, New York, which was once a coal-mining plant that powered tire manufacturing, drawing electricity from the Niagara River.
“Just imagine the irony that Buffalo imploded because China became the global manufacturing center, from where Buffalo was located many years ago. But now you have a whole vertical market that has migrated from China to the United States in economically disadvantaged places like Buffalo. The circle is complete. It’s poetic.
BIT Digital is also a signatory of the UN-backed Crypto Climate Accord, which set the industry’s goal to be net zero carbon by 2040.
Teana Baker-Taylor, policy director for the Digital Chamber of Commerce, agrees that the exodus represents both “an economic and a technological opportunity” for the United States.
But the country is “potentially at a disadvantage” in implementing regulations on crypto assets, she said, compared to Europe where the EU and the European Council are working to create a regulatory framework on crypto assets. crypto asset markets.
Sustainable migration
As institutional capital pours into bitcoin and other crypto assets, Mr Rauchs says the biggest risks to the industry are environmental, social, and corporate governance, as well as compliance and regulation – regardless. where the mining operations are located.
Regarding the migration of minors, he adds that “miners will always be motivated by their quest to find the lowest cost of electricity”, which means that it may not be a ban that triggers the next one. Exodus.
“As you can see, bitcoin was once concentrated in two regions of China and now it is spreading to Russia, Kazakhstan and the United States,” Mr. Rauchs said. “Unless energy markets stabilize globally, I don’t think this bitcoin migration is going to stop.”
This article first appeared in the December 2021 / January 2022 edition of fDi Intelligence magazine. Read the online edition here.
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